Budget "DUES" and Don'ts

It’s that time of year again . . . no, not Halloween, it’s time to prepare your association’s 2014 budget! This is often a challenging task for directors. Expenses increase every year, yet boards are hesitant to increase assessments to meet those expenses.

Since the economic downturn in 2008, many boards have not increased assessments and have cut expenses wherever possible. This has enabled some community associations to remain fiscally healthy, while others have experienced unforeseen expenses which have resulted in a budget shortfall each year. As a result, many associations have deferred maintenance and/or failed to fund the reserves to the level recommended by the association’s reserve analyst.

While no board wishes to increase assessments, especially when many owners continue to struggle financially, the board has a fiduciary duty to practice prudent fiscal management. The board is also charged with the duty of maintaining property values, which means conducting necessary repairs, maintaining landscaping and sufficiently funding reserves. Although many directors believe that maintaining assessments at current levels will keep the properties marketable, oftentimes the result is the opposite. Each year the association must disclose to its members the amount of the reserve shortfall per home. If the shortfall is substantial, potential buyers may be wary of purchasing a home in the community and/or it may be more difficult to obtain a loan or refinance due to the concern that there will be a special assessment at some time in the near future.

Failing to adequately assess to meet the association’s operating expenses and reserve funding could expose directors to legal claims by owners for breach of fiduciary duty. Board members are protected from personal liability if they act in good faith, in a manner believed to be in the best interests of the association and with such care, including reasonable inquiry, as an ordinarily prudent person in a like position would use under similar circumstances (Corporations Code Section 7231). This is referred to as the Business Judgment Rule. By following the recommendations of the association’s reserve analyst, board members’ personal assets will be protected should any owner accuse the board of breaching its duty of practicing prudent fiscal management.

No director wishes to be the “bad guy” by raising assessments. But these difficult financial decisions must be carefully examined and assessments must be maintained at levels that keep the association in a healthy financial condition. It is important to remember that running an association is a business, and directors must sometimes make difficult decisions to discharge their responsibilities.